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Tax Cuts for the Wealthiest Don’t Stimulate the Economy: Report

In less than a week Mitt Romney and President Barack Obama will face off in the first of three debates. The focus is domestic policy, and taxes will undoubtedly be a key topic.

President Obama wants to extend the Bush-era tax cuts for all but those earning more than $250,000. Romney wants to extend those tax cuts for all including top earners, cut individual rates another 20%, and eliminate the capital gains tax, making up for all revenue losses by closing loopholes.

Both plans assume that tax cuts help boost economic growth but a new report released by the Congressional Research Service questions the impact of tax cuts for the wealthiest Americans. The nonpartisan CRS says cuts in the top marginal tax rate and top capital gains tax rate "do not appear correlated with economic growth."

The report says cutting top tax rates don't appear to boost saving, investment or productivity, or the size of the economic pie, but do seem to increase disparities in income.

The idea that you cut taxes to stimulate the economy has been the center of the Republican plank for 30 years starting with Reagan, says The Daily Ticker's Henry Blodget. "This Congressional Research Service report, which is nonpartisan, says there's no evidence that that is true."

Current top marginal tax rates are 35% on income and 15% on capital gains and dividends. All are set to expire by year-end if Congress doesn't act to stop implementation of the Budget Control Act. That law mandates that the top marginal rates will jump to 39.6% on income and dividends (as they were when Bill Clinton was president) and 20% on capital gains after the new year.

But even those rates are much lower than historic rates. In the 1950s the top marginal income tax rate topped 90% and the top capital gains rate was 25%. The Congressional Research Service says tax rates for those with the highest incomes "are currently at their lowest levels since the end of the second World War."

And the share of the income earned by the top 0.1% of families is more than double their share in 1945---9.2% during the 2007-2009 recession, though lower than 12.3% just before the recession hit, according to the latest data from the Congressional Research Service.

Don't be surprised if President Obama refers to the Congressional Research Service report in the debate next Wednesday night debate. Stay tuned.